Assets and liabilities at the end of 2005 for Tripod Inc. are $4,970 and $2,220 respectively. Net income and dividends for fiscal 2005 were $500 and $200, respectively. Tripod has 100 shares outstanding as of 12/31/05. Net income is expected to grow at 10% for the next three years (2006-2008). The dividend payout ratio is expected to remain at 2005 level for next three years. After 2005 abnormal earnings are expected to be zero. Cost of debt is 8% and cost of equity is 15%. What would you be prepared to pay per share for Tripod stock at the end of fiscal 2005, using the accounting based equity valuation formula?
| At the end of 2005 for Tripod Inc | |
| Assets | 4970 |
| Liabelity | 2220 |
| Net income | 500 |
| dividends | 200 |
| shares outstanding as of 12/31/05 |
100 |
Net income is expected to grow at 10% for the next three years (2006-2008).
The dividend payout ratio is expected to remain at 2005 level for next three years.
After 2005 abnormal earnings are expected to be zero. Cost of debt is 8% and cost of equity is 15%.
Valuation of Equity
Tripod Inc.
| 2005
Amount in$ |
2006
Amount in$ |
2007
Amount in$ |
2008
Amount in$ |
|
| Stock Holder equity | 2750 | 3080 | 3443 | 3842 |
| Net Income | 500 | 550 | 605 | 666 |
| Devidend | 200 | 220 | 242 | 266 |
| Devidend Pay out Ratio | 40% | 40% | 40% | 40% |
| Cost of equity (k) | 15% | 15% | 15% | |
| Dollar Cost of equity (Kx Book value) | 413 | 462 | 516 | |
| Residual Income | 138 | 143 | 149 | |
| Discount Factor | 0.8696 | 0.7561 | 0.6575 | |
| Prasent Value oof residual Income | 120 | 108 | 98 | |
| Sum (Prasent Value of residual Income) | $326 | |||
| BV | $ 2750 | |||
| Total Intrinsinc Value of equity | $ 3076 | |||
| Number of share | 100 | |||
| Value per share | $ 30.76 |
